Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.

Of course, private-private coordination has been the essence of economics for the past 250 years. While Adam Smith started us on the optimistic belief that an invisible hand would take care of most coordination issues, in the intervening period economists discovered all sorts of market failures, informational imperfections, and incentive problems, which have given rise to rules, regulations, and other forms of government and societal intervention. This year’s Nobel Prize in Economic Sciences was granted to Oliver Hart and Bengt Holmström for their contribution to understanding contracts, a fundamental device for private-private coordination.

But much less attention has been devoted to public-public coordination. This is surprising, because anyone who has worked in government knows that coordinating the public and private sectors to address a particular issue, while often complicated, is a cakewalk compared to the problem of herding the cats that constitute the panoply of government agencies.

The reason for this difficulty is the other side of Smith’s invisible hand. In the private sector, the market mechanism provides the elements of a self-organizing system, thanks to three interconnected structures: the price system, the profit motive, and capital markets. In the public sector, this mechanism is either non-existent or significantly different and less efficient.

The price system is a decentralized information system that reveals people’s willingness to buy or sell and the wisdom of buying some inputs in order to produce a certain output at the going market price. The profit motive provides an incentive system to respond to the information that prices contain. And capital markets mobilize resources for activities that are expected to be profitable; those that adequately respond to prices.

By contrast, most public services have no prices, there is not supposed to be a profit motive in their provision, and capital markets are not supposed to choose what to fund: the money funds whatever is in the budget.

In the budget process, the finance ministry estimates revenues, targets a certain fiscal deficit, and deduces the overall spending level consistent with these numbers. It then proceeds to allocate funds to all existing commitments and entitlement programs. The remainder is assigned for discretionary spending across various ministries in proportions often related to past budgets. Typically, ministers fight jealously over these spoils, as their ability to leave a mark in their respective fields often depends on it. Under this system, why would a minister spend money on another minister’s priorities?

But addressing most problems in government involves multiple agencies. For example, bottlenecks in the tourism industry may involve airports, tourist visa requirements, or hotel construction permits, none of which falls under the tourism ministry. Organizing the public-private dialogue to identify problems and propose solutions is eminently doable, as Piero Ghezzi, Peru’s former minister of production has shown. But organizing the public agencies to respond in a coordinated manner, given existing budgetary procedures, is a different matter: the ministry of foreign affairs may not give much importance to tourist visas. With separate and relatively independent budgets, coordination becomes very difficult.

One solution is to create a market-like mechanism within the government. The idea is to assign a portion of the budget, say 3-5%, to a central pool of funds to be requested by one ministry but to be executed by another, as if one was buying services from the other. These resources would allow the demand for public goods to permeate the allocation of budgetary resources across ministries.

Two metaphors may help clarify the idea. Universal banks offer deposit accounts, credit cards, mortgages, business loans, and other products. At the front end, an account executive manages the relationship with the client. At the back end, a different department produces each service. The amount of resources that the back end gets depends on the demand for services identified at the front end.

A similar situation arises in international financial institutions like the World Bank. At the front end, country directors manage the relationship with the “client,” meaning the country government. At the back end, experts in education, roads, electricity, water, and health care design and analyze project loans. The budget is given to the front end and the back end must “sell” their services to the front end, thus creating an internal market, so that resources are allocated based on client needs.

While all ministries have their external constituencies, some ministries have more of a front-end, “account executive” nature: their core mission involves coordinating the provision of public goods to different parts of the economy. Ministries of agriculture, industry, tourism, and urban development, are some examples. By contrast, finance and infrastructure ministries of have more of a back-end character.

The central pool of resources is designed to increase the responsiveness of one ministry’s back end to the demands of society as identified by another ministry’s front end, without these resources competing with the priorities that each ministry has for its “own” budget.

By allocating a small proportion of each year’s budget to priorities identified in this way, we may find that, over time, budgets become more responsive and better reflect society’s evolving needs. And public-private coordination may flourish once the public-public bottlenecks are removed.

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Comments

I love the way the Public Sector Coordination problem is so clearly and simply articulated. The solution seems exciting, except I tend to cons=cur with Per Kurowski, the incentives of bureaucrats (not politicians - these may be easier to decipher) should never be under estimated. I also think that the solution would work well in Private Sector as the bonus or promotion motive of the players there can be leaned on to ensure this works. With Public Sector, especially in the regions where the lack of coordination is in intensive care, the incentives that drive the bureaucracy are much more difficult to address. Read more

An interesting idea but I think that the gaming capacities of government bureaucrats should never be underestimated.

Perhaps of more interest would be to develop auditing agencies that deliver useful information to those who are supposed to hold governments accountable, namely the citizens.

For instance, in these days of so much discussions on Universal Basic Income, where does one find what the costs of redistributing as a percentage of what is redistributed is?

For instance, in a case like Venezuela, simple data, like how much was the last quarters net oil revenues per citizen, or how much was the subsidies to domestic sold gasoline calculated at world market prices, would have stopped in its tracks a lot of that nonsense that has brought my country to its knees. It would have made it easier for the poor to understand how they were cheated out of much of that oil wealth assigned to Venezuela by the providence.

I like the fact that the problem of public-public coordination is finally brought to analysis. I would add other issues regarding this topic. Public organizations in Colombia, for example, tend to be redundant and even hindering to each other (many organizations around the same objective) which not only ends in lower outcomes but also generates unnecessary public expenses and higher public imbalances. Disparities between national-level public organizations and the ones at the local level also create serious problems in terms of deliverance. Read more

The large number of government programs that have failed to carry out their duties and the dim view many Americans have towards Washington may be starting to take its toll on those who think big government is the answer. Sadly as people become more aware of cost overruns and the unsustainability of big government reality will quickly begin to show the flaws in this theory,

The Democratic Party has long been thought of as the party of "big government" filled with believers that government can solve and is the answer to curing many of our woes, in our poorly planned two party system it is ironic that the Republicans are just as inept and/or corrupt that they cannot bring focus to why government fails to produce reasonable outcomes. Bottom-line is we are the ones who suffer in such a polarizing environment where needed change cannot occur.

http://brucewilds.blogspot.com/2013/11/flaws-in-big-government-concept.html Read more

I love your article and the ideas of solutions on public sector coordination problem. I read so much about Venezuela's problems and this are great ideas on HOW we could get OUT of public-public coordination. IT is so true that they DO listen to the Pope and Zapatero they will listen as a client to Jim Yong Kim and other Country directors. I believe that will be a gigantic fist step to organize the public-private dialogue to identify the problems and solutions we need to see HOW this red public agencies will respond if in a coordinated manners or totally opposite. Most important is that the PRIVATE SECTOR need to get INSIDE I don't know but it is so frustrating i just read last week that we were place by the world bank Doing business report 2017 as one of the more difficult country the world out of 200 hundred we are rank 189 impossible for ding business because of this public-public and bottleneck.Marisela Renshaw Read more

Mr. Baur doesn't seem to understand the difference between private and public. A private entity perfoms in search of profit, monetary profit. A public entity, on the other hand, performs in search of welfare for as big a portion of society as it can, irrespective of monetary profit. So, there is a clear natural conflict of interests between the two worlds. Read more

In the Federal government, the "account executives" are Senators and Congressmen, who are obliged to act collectively. Hausmann is suggesting that we allow these representatives to act independently in negotiating with Federal agencies for services for their constituents. That already happens to some degree. Hausmann is simply suggesting that we may want more. Perhaps more importantly, his proposal could help isolate national priorities (like defense), which merit collective consideration by the whole Congress, from the small bore, pork-barrel projects that individual Congressmen can judge. Read more

Sure - start by privatizing the police and army. See what happens next.

Some things need to be private, others need to be public. I know this idea gives you a rash, Dan, but if the fire department only put out fires for people who were willing and able to pay then the fires would spread and burn uncontested. Read more

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